Destiny Media Technologies' (DSNY) CEO Steve Vestergaard on Q3 2014 Results - Earnings Call Transcript

Jul.14.14 | About: Destiny Media (DSNY)

Destiny Media Technologies (OTCQB:DSNY) Q3 2014 Results Earnings Conference Call July 14, 2014 5:00 PM ET


David Mossberg - Three Part Advisors, IR

Fred Vandenberg - CFO

Steve Vestergaard - CEO


Hubert Mak - Cormark Securities

Robert Kecseg - Las Colinas Capital Management


Good afternoon, ladies and gentlemen. Welcome to Destiny Media Technologies Inc.’s third quarter fiscal 2014 earnings release and conference call. [Operator instructions.] I would now like to turn the conference over to David Mossberg, investor relations. Please go ahead.

David Mossberg

Thank you, operator. Thank you, everyone, for joining us on the call today. Before we begin, we will be referring to today’s earnings release, which was sent to the newswire earlier this afternoon.

I also should remind everyone that this conference call could contain forward-looking statements about Destiny Media Technologies within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based upon current beliefs and expectations of management, and are subject to risks and uncertainties which could cause actual results to differ materially from those forward-looking statements.

Such risks are more fully discussed in the company’s filings with the Securities and Exchange Commission and SEDAR. The company does not assume any obligations to update information contained in this conference call.

During this conference call, we will discuss certain non-GAAP financial measures. These non-GAAP financial measures are presented in the supplemental disclosures. They should not be considered in isolation of, or as a substitute for, or superior to the financial information prepared in accordance with GAAP, and should be read in conjunction with the company’s financial statements filed with the SEC and SEDAR.

The non-GAAP financial measures used in the company may differ from similarly titled measures presented by other companies. A reconciliation of non-GAAP financial measures to the most comparable GAAP financial measure can be found in our earnings press release.

Our speakers today will be Steve Vestergaard, chief executive officer, and Fred Vandenberg, chief financial officer. With that, I’ll turn the call over to Steve.

Steve Vestergaard

Thank you. Thanks for attending our 2014 third quarter conference call. I’m going to start here with a quick summary of the quarter, then I’ll turn it over to Fred to do an analysis of the numbers. And then I’ll come back and continue with more detail and more color on our strategy and progress.

So our revenue grew 16% from the previous quarter, Q2 2014, which is our seasonally slow quarter, but more significantly, we’re up 8% from Q3 last year, so year over year is up 8%. We’ve continued to generate positive cash flow, even after subsidizing the R&D efforts on Clipstream.

Revenue growth this quarter was led by Play MPE, with a number of wins this quarter. We’re working to cross the chasm with our disruptive Clipstream solution and have been building out several products around the engine to address various markets. We’ve been recruiting a senior executive team and will soon be ready to go on to the next phase in the company’s growth.

So on that note, I’ll turn it over to Fred.

Fred Vandenberg

Thanks, Steve. Q3 fiscal 2014 is the first quarter where I can compare revenue growth with Play MPE from the top line down, with a comparable quarter in the past year. That is, the contractual term with UMG in Q3 of 2013 is the same as it is in the current quarter, so when I’m comparing revenue results, we can start at the top line and not be comparing apples and oranges.

Play MPE revenue for the quarter grew by 9% compared to the prior year and 18% over the immediately preceding quarter. This growth is fairly roughly evenly divided into three contributors. Play MPE revenue in the United States grew by 8%. This is really fueled by a 20% growth in USA independent label revenue. This segment has grown in 23 of the last 24 comparable quarters, so that represents six years where virtually every quarter has seen growth in revenue.

The second one is growth in the Australian revenue, with the addition of Sony Music Entertainment Australia, which had gone to a competing system for the last two-plus years. And lastly, we had experienced some positive exchange rates with the euro strength relative to the U.S. dollar.

There are two main areas where there was a small percentage positive impact on revenue, but are worth commenting on further. First, in Q3 our new agreement took effect in the prior year and that had certain contractual adjustments, including a reduction in overall pricing. Since that time, however, activity with UMG has grown substantially.

Overall, usage has grown by 43% while chargeable use has grown by 83%. This growth comes from a number of areas. It’s persuasive. We send more releases. Those releases are larger, and those releases go to more people. And this growth is seen in Europe, the U.S., and Australia.

During the quarter, chargeable use from UMG exceeded the minimum in two of the three months. However, this overage is not substantial and does not impact the revenue line significantly. Continued growth, however, in chargeable use will be accretive to revenue.

Secondly, with the new agreement with Sony Music Entertainment Australia, we are now the only system in Australia that is distributing all major label content. We believe that with this network of use on Australian radio and with the Australian majors, independent levels and artists, it will be more advantageous to send through Play MPE and they’ll have a greater chance of being heard at Australian radio if their songs are in Play MPE. We have seen some recovery of this revenue in Q3, but again, that did not significantly impact revenue.

Moving on to expenses, total operating expenses increased by 2.6%. In general, there’s really only minor fluctuations with small increases in a few areas. There was a small increase in office rent, some costs with Google advertising and fees associated with a consulting agreement associated with the building of the organizational structure and staffing needed to take Clipstream to market.

The shift in overall costs allocated between sales and marketing and development really comes from Play MPE staff shifting focus from technical development to more business development type activities. We will continue to send staff to meet with labels regularly throughout the United States, Australia, and Europe. This, along with the completion of the web-based encoder and obtaining marketing metrics on our U.S. recipient list will be keys to growing revenue over the near term.

Lastly, we were able to grow cash reserves up by approximately $170,000 to over $1 million. This is primarily the result of cash provided by operations.

And with that, I’ll turn it back over to Steve, and I’ll be available on the call for questions later on.

Steve Vestergaard

Thank you, Fred. So I know investors are looking for timelines for further sales growth in both products. So what I’m going to do is I’m going to recap some of the successes for both products, what the opportunities are, what the challenges we’ve identified have been, and how we’ve found solutions to those challenges.

It’s taking us a bit longer to solve near term challenges than I’d hoped in previous calls, but the high-margin growth is coming, and the opportunity for both products is as big as ever.

I’ll start with Play MPE, which is an automated security solution the record companies use to securely send pre-release music to trusted recipients such as radio stations. It’s based around our locking and watermarking patents and a suite of encoding, server, and player software applications, and our own server infrastructure in North America, Europe, and Australia.

Our business model for Play MPE is to charge the record companies a fee for each recipient they offer free music to. We provide a recipient free tools to access the music and are integrated into a number of third-party systems, making the recurring revenue stream extremely sticky.

There’s a seasonality to usage from one quarter to the next. For predictability, when comparing same quarters from year to year, we offer investors the safety of a current revenue stream that profitably pays the bills for existing expenditure levels. As we add new revenue, margins are high, as most of our expenses are fixed. We’re expecting to be cash flow positive as we roll out Clipstream.

We’ve continued to grow independent revenue as we’ve done in every quarter in the last six years, and revenue levels for our UMG contract are finally above the monthly minimums they’re required to pay us. That means UMG growth will show in our reported revenues going forward. We’re still expecting to grow internationally and have been expanding sends into new markets.

Revenue impact has been marginal to date, but this growth is still coming, and the efforts in these new markets over the last few years are expected to bear fruit. We were able to add a brand-new sub label, Sony Australia, effective this quarter, and were able to license our metadata to Shazam as per our previously announced contract.

The year-one revenues from this contract are minimal but it offers a big benefit to our customers. Shazam identifies music for consumers and third-party offerings, and now our customers know they can get their information accurately into Shazam’s database the minute the song is made commercially available.

We entered into a new global agreement with Universal in May of 2013 that merged a number of agreements we had with their labels around the world into a single international agreement. Some of the terms in that contract caused a reduction in total UMG revenue in 2013, but other terms have accelerated clauses that incented worldwide usage and a term that gave us minimum monthly revenues.

This agreement made business sense, because of the largest major, UMG usage in any new territory would pave the way for us to do business with the other majors and independents in that brand new territory.

One of our challenges with the majors has been high staff turnover at the executive level, and some of the people we’ve dealt with in both Europe and Asia have moved on. This, among other reasons, has delayed rollout into new territories, and there’s been some erosion of existing major revenue at some labels in some key markets as regional competitors with minimal solutions have been able to take some business away from us, generally because of lower costs, but also because other solutions are often very simple to use.

The advantages of our system are overwhelming, but as a relationship driven business, this has meant that we’ve had to invest in meeting new people in the music distribution role to communicate those advantages and to listen to their feedback. These efforts have been productive, and we expect to not only grow usage in these organizations, but also to recover a business that has gone to competitive solutions.

Our solution is extremely powerful. It’s a permission-based account management system where the administrator at the label can assign different tasks such as encoding audio or video, managing lists, creating the alerts, setting permissions, etc. to various staff within the label.

But with that sophistication comes complexity. Some of the feedback we are receiving is the promotion staff would use the system a lot more if a simpler web-based encoder was available. This encoder has been under development for a couple of quarters now. We expect another big uptick in growth when it launches later this year.

This new software will be easier to use, meaning it will be used more widely within the record labels, but it has all the security reporting of the main system. Importantly, it gives autonomy to the sub labels, who currently have to have their sends encoded by head office.

Going forward, the outlook for growing Play MPE revenues while maintaining expenses is very bullish. The challenges we’ve identified are mostly behind us.

Next, I want to discuss our billion dollar plus revenue opportunity for disruptive Clipstream technology. Clipstream is a new streaming format that plays everywhere without proprietary streaming servers and player plug-ins.

There’s been a lot of confusion on this product. Much of that has been because of my communication style, so I want to back up and try to bring some clarity to what the offering is and what our strategy is.

The first thing is it’s important to note the distinction between the Clipstream engine and products and services that we’re building around that engine. It’s confusing, because companies that are competitors to some of our new products are actually potential customers for our engine. Just as a company can make engines that can be licensed for use in cars, motorbikes, generators, airplanes, etc., they can additionally offer their own branded cars, motorbikes, generators, airplanes, etc.

The opportunity for us is that we can roll out the products, but we can also license the engine, and that’s our key rollout strategy. I’m going to go through them kind of one by one, but starting with the engine, our engine has extremely compelling advantages.

Some high-level examples include that we can get high-definition quality without player plugins. And once the video is encoded in our format, the video will play 15 years into the future, as future browsers iterations will be backwards compatible with our format.

Compare that to looking back 15 years ago from today. Back then, video was encoded in the RealNetworks format. Those videos won’t play today. Publishers hate encoding in formats that go away over time.

Secondly, our video will play on any standard space modern browser, on any device with processing resources, including devices that haven’t even been invented yet. Compare that to the cacophony of formats that need to be supported right now. So we save the industry a fortune in transcoding, which is converting it to those various formats and hosting all of those different formats.

Third, our solution plays well in databases. Because it’s simple, it’s really well-suited for applications like online retail, where it could be used for cheaply producing product how-to type videos.

Next, we’ll be the only solution with meaningful security. Although the new HTML5 formats are completely unencrypted, we can watermark the locked videos to play on only authorized machines. This creates a business model for renting videos that are protected from piracy, but it also allows users to protect privacy by isolating who has access to that video.

High-volume users like advertisers will appreciate that our solution recycles streams through caching, saving infrastructure and bandwidth costs. Advertisers also like that we’re the only mobile-friendly interactive solution, so they can create interactive ads with interactive reporting.

As we’ve talked to customers, we’ve found that there are over two dozen separate verticals for us. Each vertical requires its own website, its own pricing model, and its own product or service with its own feature set. Knowing that we can’t do everything in parallel, we’ve kind of gone back and we’ve decided to start with four.

The first is that we’re trying to license the engine directly. An example customer would include a large ISP that wants to offer their own branded YouTube style content to their users, or an online bidding site or online dating site that wanted integrated video, or maybe a video editing software that wanted to save as Clipstream to make video hosting seamless to their customers. There are literally hundreds of examples like this, and some of our largest opportunities will come from these big but long sales cycle customers.

Second, we’ve developed a cloud product. If you go to, you can actually try it yourself. You don’t have to pay anything to try it. It’s drag and drop and automated, and makes it really easy to create and host video.

Third, we’re selling video questionnaires to market research companies through the website’s Our customers in turn resell to some of the largest companies in the world, doing test marketing of movie trailers, commercials, product launches, etc. So we’re well set to become a standard in this vertical.

And fourth, we’re test marketing our new ad format. You can see our format yourself at or Since February, we’ve test marketed our own ads to the tune of millions of impressions over a dozen separate websites. The quality of service is being extremely high, so we’re very proud of this ad technology.

As we’ve expected during our first phase one soft launch of the engine and our first three products, early adopter customer feedback has identified a number of weaknesses that we need to fix. And we’ve actually been doing a lot of development since December.

Going through the issues, for the engine itself, we’ve found that the way we deliver video has caused a low quality of experience to some users. In the U.S., the average bandwidth is about 9 megabits per second. Most of the world gets more than that. For us to offer HD quality, we only need 4 megabits a second. For us to offer YouTube quality, we need about 2 megabits per second.

Unfortunately, we’ve found that a fraction of the users are getting worse than YouTube quality, and that’s unacceptable. And the issue is the way our system works is causing the ISP to throttle bandwidth. So I stress this isn’t a Clipstream issue, but it’s the networking below Clipstream. Clipstream looks at the available bandwidth, and it automatically degrades the quality to fit whatever bandwidth is available.

We’ve identified that users who get speed tests that show they’re capable of 10 megabits per second often get actual performance and actual throughput as low as a half megabit per second. I don’t want to get too technical, but I want to get technical enough to show you that we’ve identified the core issues with networking that have been causing the problems, and two of the four have already been fixed. Users should have seen quality start to creep up over the last six weeks, and you’ll see it continue to creep up. Our goal is for every viewer that uses Clipstream to get the 960 HD quality.

We currently use our own servers for the Clipstream logic and Amazon for the actual raw hosting. We’ve almost finished a new development module that lets us easily integrate into any third-party hosting system while keeping the auditing and logic on our servers. We expect to lay up Google hosting as a second supplier to Amazon in the next few weeks.

The main remaining networking issue about the way JavaScript, the technology we’re using for playback, communicates with servers. When you connect to a server, there’s a delay when you connect, then the data transfers at high speed. With the other server-based solutions, they only connect once and only get the delay once, so when you’re comparing us to them, you’re comparing apples to oranges.

Unfortunately, with our solution, we encounter the delay every time we send a chunk of data, so we’ve currently chosen a buffer size of two seconds, which means you only wait two seconds from when you click “play” until the video starts playing. But that shorter buffer size means that every two seconds, there’s another delay, another connection, another delay, which effectively throttles the effective bandwidth.

Luckily, we’ve found solutions and we’ve been working on the solutions for a number of months, and we’re well on our way to finishing the adaption of Clipstream to eliminate this connection delay. We expect most users will get HD when we launch that new version up the engine.

Going through the products, for our cloud product, we’ve had a really positive response from early adopters such as web developers, but we’ve also identified key required features that other cloud offerings have that we missed. We’ve been building out these features and are finally getting close to being at the end of the wish list that we’re getting back from early customers.

For investors who have signed up for the cloud offering, they may have noticed that every few weeks this year, a new suite of features has been added to the offering. The feedback on the improvements has been extremely positive, and when we feel that we get to the end of the list, we’re going to wrap up our search engine advertising, which is pretty minimal and targeted right now.

One feature we’ve had demand for in this product is a corporate version that isn’t credit card driven, but where a company can give individual accounts to individual employees. This will create a global build basically segmented into different billing units in the company. We think we’ll be able to do some really large corporate offerings when this is completed.

The next product is our market research product. We’ve been under heavy pressure to launch our security pack from the market research users. The current offering that we’ve given them has minimal security. The new pack, which has very sophisticated security, is in final testing. We expect market research usage will increase a lot when it goes live. You can actually expect an announcement on this one really shortly.

Finally, our ad product at this point is a proof of concept. We can offer it as a service to advertisers, but it involved doing some encoding by hand, because there’s no ad encoding tool yet. We’re also trying to understand the features that ad customers require.

So with an old streaming product we had 10 years ago, we’ve signed up 150 ad agencies to sell into, speaking of selling to their customers. We have more than half the Fortune 100 companies using us. This is a really lucrative model, because their sales team sells to the end customer for us, but it involves integrating it into their existing workflow.

We’ve been working with companies and consultants in this space to try and build up the features and capabilities they need to turn this commercial prototype into a product they can pay us for. This vertical is probably the most lucrative and one we’re going to focus on heavily, but we need the engine and the other two products kind of finished first.

We’re also working on development for features that will be required for future product verticals. A really large one is our movie security pack, which will extend the security abilities of the survey security pack to protect extremely valuable content. This technology will rely on IP we use in our Play MPE solution.

What’s really important to understand is that our advantages and shortcomings vary depending on the opportunities and depending on the verticals. As an example, the quality of our market research and ads product is perfectly fine already today, because the video never needs to go full screen, so the networking issue doesn’t come up, whereas that is an issue with the cloud movie offering. On the other hand, people may be willing to wait longer than two seconds for a movie to buffer, making that issue go away, even without any networking fixes.

As another example, someone selling the movie really cares about security, and someone showing an ad would love to have their ad pirated, and they actually don’t want any security. Another example, a market research company, being low volume, wouldn’t care about our recycling of streams. That would be really important to an ad doing tens of millions of impressions.

So we’re putting a lot of effort into being really deliberate in our approach to segmenting our offerings and strategies in our first phase, but we’re soon ready to enter the second phase of our commercial rollout. We’ve been aggressively recruiting senior-level executives since the beginning of the year to run the Clipstream sales unit, and we’ll be building out large sales teams underneath them as the products show commercial traction.

We’ve wanted to have solid product offerings with early adopters in each vertical as they start to work with us. I understand why market sentiment has turned a bit negative, and the reality of building a disruptive business takes more time than people might hope, but we expect the Clipstream suite of products to be just as big as we’ve always said it will be.

To summarize our outlook, we’re taking a disciplined approach to product development to four verticals. We’re building a security system for a fifth. Second, we recognize that it’s important to hire the right people, and we’ve been recruiting with the idea of building an executive team of people that have done it before and who can do it for us very quickly once the products and early customers are there for them. We’re timing to bring these high-salaried individuals on as we finish our development base in the early verticals.

Third, ongoing development in each product category will be customer-driven, and new features will come through the sales team. We think that this is the secret to crossing the chasm and moving Clipstream into a highly visible mainstream offering that is the first choice for anyone wanting to do video because the advantages are so clear and compelling.

Four, I’ve been advised not to give timelines and forward-looking guidance, but we’re not far from showing our first larger traction. So, on that note, I’ll open the call to questions.

Question-and-Answer Session


[Operator instructions.] Your final question comes from Hubert Mak from Cormark Securities.

Hubert Mak - Cormark Securities

My first question is around the Play MPE. I wasn’t quite clear, but I understand from your comments that you’re seeing chargeable transactions from Universal up 83% and I guess you’re exceeding global minimums for three months. So going forward, should we expect to see accelerated growth come from UMG as they roll out the international countries?

As well, can you comment as to the progress with rolling out internationally? I think you did mention you guys were having some challenges with executive turnover. So can you just kind of comment in terms of the outlook of what you see with UMG specifically?

Fred Vandenberg

The chargeable usage has almost doubled. It’s grown 83% from the prior year. And that’s all under the umbrella of the global minimum. So if you’re expecting to see growth beyond that, I don’t know if I can answer that question, because now they’ll start seeing increases in charges.

They are growing throughout Europe and small growth in the United States, and growth in Australia, so what I think is, growth is coming from a number of places. First of all, what is subject to being charged is growing. The number of deliveries is growing. And even though they’re getting charged more, I don’t think you slow down that process. It’s pure speculation, but we are seeing them roll out Play MPE in different territories. So the truth will be told in the future, I think.

Steve Vestergaard

Another comment on Universal is they’re kind of like the anchor tenant. So if I own a shopping mall, I probably want to have a Walmart in my mall, because it almost doesn’t matter how much you make off the Walmart. It builds the rest of my mall. So it will bring in all the other stores.

The same thing happens here. When Universal rolls into a new market, it makes it easier for us to sell to Warner and Sony. They kind of follow Universal’s lead, because Universal’s about 45% of the major market.

And then once we have the three majors, then the independents really have almost no choice but to use us. And Fred was kind of alluding to that with Australia, that Australia is a market that we’ve completely locked up. And so if I’m an independent and I want to get to radio, if I send them a CD, or I use an alternate system, I’ve got a real low chance of having a song played, because radio’s only looking for one place to get the song.

So we are expecting growth from Universal. We don’t like to speculate, because it’s a little bit out of our control, but Universal will be the catalyst to help us grow the other majors, and with the independents.

Hubert Mak - Cormark Securities

I understand how it brings on additional revenue from other companies, other music labels. Maybe another way to ask is, you’re two months above minimums. I know in the past two quarters, it’s been back at that minimum, right? So now that you have two months over, should we not expect that the revenue from UMG…

Steve Vestergaard

Yeah, I think exactly. What’s been happening is, Universal has been growing, but that growth is being masked, because it’s been growing below the minimum. So even though they’re using it more, they’re not paying us more, because their usage pre-historically has been below the minimum.

A big catalyst to get them to use it a lot more is that the web-based encoder is going to allow the promotion staff all over the place to encode directly. Currently, if they want to encode something, they’re having to go through head office. It’s often like a three to five day wait for them to get head office to encode something for them. So this web-based encoder is going to increase usage a lot. Going into new territories, it’s going to increase usage a lot, and increasing their distributions.

Where Fred’s being a bit cautious is that sometimes, in some territories, if the billing goes up, they become more careful about who they send to. In the U.S., for example, they like to keep their usage close to what their historic U.S. minimum used to be. So I’m assuming that global has probably given them a line item that they’re trying to work underneath.

So we’re kind of working to line items, but that said, all the indication is that usage is going to continue to grow at the rate that it’s been growing.

Hubert Mak - Cormark Securities

You made a number of [unintelligible] in terms of the architect [unintelligible], and four key verticals. It sounds like each of those you’re getting some feedback and there’s some technology improvement that needs to be made. I don’t know if you can just sum that all together, but call out two key verticals, whether it be advertising, web developers. But in terms of basically you guys are working on improvements, can you guys concisely tell us when the technology will be completed? Like the timeframe? And whether you can comment on when we should start seeing revenue coming through for Clipstream….

Steve Vestergaard

Revenue is coming through for Clipstream now. First of all, the cloud product is not just a web developer product. That’s a product that anybody can use. You could use it yourself. It’s drag and drop. It’s kind of meant for anybody that wants to put video content on the web.

But it’s clearly inexpensive, so the typical person coming in and getting get a $5 a month account or a $20 a month account. So a new user comes in in a quarter, what’s it generate? Sixty bucks for us? It’s not meaningful.

But what we need is that core engine, because that’s what gets us to the other opportunities. So for example, the ad vertical behind the scenes is going to be powered by the cloud. So we need to do the cloud first. The reason we’re targeting web developers is in some ways they’re the pickiest customers. They help us figure out what’s missing from the system.

So I’m kind of going round about answering your question. Currently, the bulk of the revenue that we’re showing, and I know the revenues this quarter were a bit of a pittance, but that’s all coming from market research. And the reason why it’s not more is because the security pack’s not there for them.

If I’m doing a test marketing of a movie trailer or something, I don’t want the version that I don’t use to show up on the internet somewhere. So we’re very, very close to launching that security pack, and that’s going to be a big catalyst for growing the market research.

The ads we can sell today. Currently, we sell them as a service because there’s no encoder software, so they can’t self-serve yet. The bigger offerings with the ads are going to require integration into both their workflow, but also to existing system solutions.

So as an example, typically when an ad goes out, it will go through a real-time bidding network to figure out what ad to show to what consumers. You’ve probably noticed that ads follow you around. Different people coming to a website will see different ads. Then you’ve got to work with their current hosting partner. That was why it was so important for us to adapt the back end so that we can plug in other providers.

Currently, we’re about to support Google, and we’re currently supporting Amazon. We set it up that if an advertiser has their own relationship with an [unintelligible], Rackspace or something like that, that we can just plug that in. We need to work with companies that do auditing and the companies that do reporting.

So what we’re doing at this stage is we’re working with consultants and early ad agencies to basically tell us what to build. We’re kind of working with them to figure out what their wish lists are for us to get into that world, that network.

In terms of the engine, again I don’t like to give artificial deadlines. That’s not worked well for me in the past. But we’re very, very close. So as I said, there were four issues that were causing the networking to be slow. Two of the four have been addressed. The remaining two are well underway.

Whenever it’s getting to HD, we will press release that. So imminent, but I’m not going to commit to a timeline.

Hubert Mak - Cormark Securities

Would it be fair to say what the [unintelligible] would be? Sort of in your first key markets outside of your market research?

Steve Vestergaard

Market research is going to be the first big market. Currently, we’re very targeted. We’re targeting web developers, but when we’re ready, we’ll expand our Google and other search advertising to target more of the general population. What will typically happen is you’ll have somebody that’s working for a big company, and they’ll come across it and they’ll set up a $5 account with us. But if they like it, they can now go internally and sell the corporation.

So on the cloud product, our biggest revenues are going to come from the corporate sales. But some of the feedback we’ve gotten from the corporate guys is that they want to have a better billing system. They don’t want to be putting through credit cards. They want us to give them a master bill and have that master bill be broken into subaccounts. Maybe accounting has an account, and maybe marketing has a different account, and we need to break it all out for them.

So as we go through the selling process, with each vertical and each customer type within the vertical, we’re finding not huge development, but we’re finding new development projects that we have to build out. Basically, we’re digitally shrink-wrapping the products. So we’re going from raw technology to something that’s really easy for people to buy.

Hubert Mak - Cormark Securities

Are you able to provide whatever your uptake is, in terms of quantitatively, what the uptake rate for the cloud offering? Is there any sort of quantitative metrics that you can provide us so we can see where we’re at?

Steve Vestergaard

It’s fairly minimal right now, but that’s intentional, because what we’re trying to do is get just enough customers to give us feedback on what we need to build. I actually don’t know the exact number, but going forward, we’re going to try and figure out some way to give people a better sense of that.

New investors may not realize it, but on the front page of our corporate site, if you go to the bottom right, you can click and you can see real time statistics, when MPE songs go out. We’re trying to think through is there something along those lines that we can do to give people a sense of what’s happening. And in future quarters, we’re probably going to do something like that.


Your next question comes from Robert Kecseg from Las Colinas Capital Markets.

Robert Kecseg - Las Colinas Capital Management

I wanted to ask you about the Clipstream. You remember recently I sent you some questions from a guy that looks at a lot of different video related companies, and he was, I guess, probably not getting the significance of the Clipstream service on the transcoding. I was wondering, do these web developers really appreciate the benefit that that creates?

Steve Vestergaard

You’ve got to think of a web developer as kind of a middle man in a way. The web developer is building a website for some third party. Some third parties care about supporting mobile, and some don’t. For example, our corporate site, we actually outsourced it to a web development company a couple of years ago. And they just came back to us and said, oh, video doesn’t work on mobile. And that’s what a lot of web developers just tell their customers. You know, on a PC it works great, on mobile you just get a little black box when you come in there.

For the ones that do care, they can go through big third parties. They can go through somebody like a Brightcove or an Akamai. Well, Akamai does it too, but an Amazon or Google’s got a service actually to do it for them. Some of them use YouTube.

But the transcoding is still happening behind the scenes, so if you upload to YouTube, YouTube has the expense of having to translate to those various video formats. So sometimes the pain is hidden. Maybe it’s pushed back through a third party supplier. So you go to somebody that says, hey, the video plays everywhere, but behind the scenes, they had to convert and host it to those various formats.

But you know, that’s only one of our benefits. Another benefit is we’re simpler. So it’s quick and dirty to make a video. I talked about online dating sites, or online retail. They’re currently not doing video because it’s too difficult, whereas we can integrate with them and kind of automate the process.

Our security is an obvious big one. Being player-less means that you get a much higher install rate. So if I’m an advertiser, I’m going to reach more people because everybody is going to be able to play the video back. I’m not relying on them to have a plug-in installed.

We also go to devices that currently don’t have video. A lot of the internet TVs today are not compliant with the standard. For the new ones as they come out that are standards based, our video will just play on those internet TVs.

And so the longevity is another real big one. If I encode the video in our format, well into the future - I said 15 years, it could be 20 years from now - browsers in the future will still play our video, because the browsers are required to be backwards compatible. By comparison to that, if you encoded it in H.264 last year, now this year you’ve got to encode in H.265, and then you’ve got WebM coming out, and everything else.

So the advantage is going to really depend on what the vertical is. For web developers in particular, we’re kind of using them as a test audience, because like I said, they’re a fairly difficult technical audience, and they give us the best feedback. And they also kind of amplify things, because one web developer could do 100 websites. But that’s not the vertical that we’re going to be targeting long term.

Robert Kecseg - Las Colinas Capital Management

And then kind of connected with that question, are there others out there trying to develop something along the lines of what Clipstream does as far as the transcoding aspect that you were talking about?

Steve Vestergaard

There’s lots of companies that are trying to play everywhere. If you Google the term “multiscreen” for example, that’s a big thing. Everybody wants multiscreen. They want their single video to play on a wide variety of devices. It’s a big problem for the industry. It’s a problem that we solve.

But those companies always solve it by doing transcoding behind the scenes. Or the other way they do it is they’ll use a common one like H.264, that reaches a lot of devices but not all of them.

But in terms of doing what we’re doing, there’s only one way to get video to play without a plugin, and that’s JavaScript. And that’s what we’ve filed all of our patents about. So anybody that tried to go down this path would be infringing on our pending patents.

Robert Kecseg - Las Colinas Capital Management

And then I just had one question on the plans. It’s kind of a repeat from before, but I was just thinking on your site, what it shows, the 71,000 plus registered users, do you have any more feedback on repeat use from the same registered users, so that you would see that it was building and people liked it enough where they were continuing to use it? Because it seems like 71,000 sounds like a lot.

Steve Vestergaard

The users are not our customers, right? They’re the recipients. And typically, they like getting free music, so once they’re signed up and the labels are sending them music, they’re not going anywhere. So they tend to be really sticky.

One issue that we do get, though, is sometimes we get users that the labels don’t care about that much. So for example, maybe I’m a small internet radio station or something like that. So we’ve got a lot of users that don’t get that much music. And so there’s opportunity for us to grow things there, by maybe playing with our pricing to make it easier for labels to send to more of our lists.


[Operator instructions.] Your next question comes from Joe [Delani], private investor.

Joe [Delani]

Steve, can you just comment on your stock price and the history of the movement of that, and where it’s trading now, and where you think it should be trading?

Steve Vestergaard

You know, the stock market would make a liar out of me. Investor sentiment is always hard to predict, so we try to concentrate on the fundamentals. If I would guess what happened, people probably got a little exuberant, a little ahead of where the business was. But it works both ways. The business plugs along. We build the business, and then sometimes the sentiment can get behind what’s happening.

I’ve been purchasing pretty heavily myself the last few months, so I’m kind of putting my money where my mouth is. But I’m not in a position to predict what the stock price is going to do.

Joe [Delani]

Yeah, but you can give your opinion on where it should be trading, can’t you?

Steve Vestergaard

I have an opinion on where it should be trading, but I don’t think it’s appropriate for me to speak to that publicly. I think it should be trading higher, but I’m not going to give you a number.

Joe [Delani]

That’s fair enough.


Mr. Vestergaard, there are no further questions at this time. Please proceed.

Steve Vestergaard

Okay, well, thank you. I know sometimes it’s intimidating to ask questions in this forum. Both Fred and I are very approachable, as is David Mossberg and his team at Three Part Advisors. So we’re all very accessible, both by phone and email, so if you have any further questions, please feel free to reach out.

Otherwise, thank you for attending, and talk to you in the next quarter.

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